The volatile market favors active investing/trading as compared with passive investing styles.
What is the difference between active investing and passive investing strategies?
Active investing, as the name suggests is an action-based investing trading strategy.
An active investor has a good understanding of technical and fundamental analysis which helps them gauge short/medium-term price trajectories. So active investors know the difference between a secular bull market and a secular bear market.
A secular bear market consists of smaller bull markets and larger bear markets; a secular bull market consists of larger bull markets and smaller bear markets. In a secular bear market, the prevailing trend is “bearish” or downward-moving.
“Active investing, as the name suggests is an action-based investing trading strategy”
So an active investor in a secular bear stock market, which we believe could be currently played out despite the recent stock rally will actively sell the highs at given intervals
Passive investing, by contrast, involves less buying and selling.
Does active investing and passive investing differ in terms of what different instruments the investor buys and sells?
Yes, the passive investor will tend to buy index funds or other mutual funds and hold those investments over a longer time frame. The last decade favored passive investing over active investing because what we had was a secular bull market induced by the Fed’s massive liquidity injections. In other words, buy and hold, or buy the dip strategies paid off well.
“an active investor in a secular bear stock market, which we believe could be currently played out despite the recent stock rally will actively sell the highs at given intervals”
If we are in a new secular bear market, where prices make lower highs and lower lows, then active investing strategies will outperform passive investing
So we believe in this volatile period, what looks like the twilight of a secular bull stock market and the likely beginning of a secular bear market, these market conditions will favor active investing strategies.
“Active investing enables the investor to benefit from short term trading opportunities” – Win Investing
Active investing strategies are typically followed by investors/traders who know the markets
So active investors have either attended a trading academy or followed a home investment course.
The more knowledge and experience you have of trading the markets the more likely you will be of trading the markets to profits.
Active investing enables the investor to benefit from short term trading opportunities
For example, during February’s 2020 coronabubble burst, active investors could have adjusted portfolio exposure to the financial sector to reduce their portfolio’s risk in the market.
Active investing also includes traders using swing trading strategies to trade market ranges or take advantage of the momentum.
What are the disadvantages of active investing?
Active investing is more costly than passive investing due to the potential for numerous transactions. If an investor is continually buying and selling stocks, commissions may significantly impact the overall investment return.
But in a market with high volatility, like the current one, we are experiencing these costs are insignificant compared with the potential profits made from active investing.